Suncor Still Under Construction

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Top Canadian oil sands player Suncor (NYSE: SU) faces very different challenges than your average integrated oil major. While companies like BP (NYSE: BP), Chevron (NYSE: CVX), or Royal Dutch Shell (NYSE: RDS-A) must seek big new fields in a thoroughly picked-over world, Suncor has all the reserves it needs. Alberta's relatively untapped base enables Suncor to target 15% annual production growth for the next five years -- enviable, to say the least. But getting that oil is a whole different matter.

First, Suncor must get the bitumen, a tar-like heavy oil, out of the ground and separate it from the commingled sand, water, and clay. Then it's got to find refiners equipped to process this oil. Suncor operates two facilities that upgrade the bitumen into a light, sweet synthetic crude that refiners crave. The company's also upgrading its own refineries to process the non-upgraded oil, but it's having far more trouble persuading outside refiners to make similar capital investments.

Suncor's lackluster quarterly results belie the company's stunning success in ramping up production over the years. Both output and expenses were hit by a minor fire at one of Suncor's upgrader facilities. Production costs are also topping expectations because of persistent labor shortages. As with ExxonMobil (NYSE: XOM), downstream operations made a splash, however, thanks to higher refining margins. Overall, net income fell 22.7% year over year, though the 2006 data includes insurance proceeds stemming from a more serious fire in 2005. Hey, oil is a volatile business -- in more ways than one.

On the earnings call, management pointed out that 2007 is a construction year above all else. Two major projects are coming online: an enhancement to Suncor's Upgrader 2 facility, and an expansion of its Firebag in-situ operations. Management's guidance for the year, and for 2008 production, essentially hinges on the timely completion of these projects, because facilities must be temporarily taken off-line in the process.

An oil company with more oil than it can handle is an unlikely situation in today's environment of maturing basins. Regardless, oil sands production will continue to present unique challenges, and Suncor will have to navigate plenty of operational risks to meet its ambitious targets.

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Fool contributor Toby Shute has never been to Alberta, but he imagines it's sort of like a colder version of Texas. He doesn't own shares in any company mentioned. The Motley Fool has a disclosure policy.